How to pay for home improvements

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 Whether you are preparing to sell your home or you just want a refresh for a new season, a home project is a big undertaking. One of the biggest questions you may ask as you plan any home renovation is how to pay for it.

Thinking ahead about how to finance your home project is essential for avoiding headaches in the future. There are many different options to pay for your home project depending on your financial status and goals. Consider all your options as you make your plan to make a choice that is wise for your financial future.

Should I finance my home renovation?

How you pay for your home renovation depends on your financial situation and the size of the project. Saving up for a specific project and using those funds is the ideal way to pay for a home upgrade. However, that isn’t always possible. Emergency expenses and larger renovations can make financing necessary.

To determine whether home improvement financing makes sense, consider your monthly budget and your project’s size and return on investment. Are you able to make another monthly payment? Will the project you’re planning increase the value of your home? How long will this renovation take?

If you’re in good financial health and the project will boost your home’s value, the extra cost of financing could be worth it.

7 best ways to finance home improvements

If you need to finance your home renovation, these options may help.

1. Save

The safest financial option to pay for your home renovation is to save a chunk of money for your project. If you don’t already have a large sum of money saved, this option can mean waiting longer to start your project. But, it also means you won’t have to worry about paying back a loan or large credit card bill once you finish your home renovation.

Key benefits: You don’t have to pay back a large sum of money.

Key drawbacks: It can take time to save money for larger home projects, and you may have to start your project later than originally planned.

Who is this best for: Someone not in a hurry to start their home renovation

2. Home remodel or home repair loan

Home improvement loans are unsecured personal loans offered by banks, credit unions and a number of online lenders. Because the loans are unsecured, you don’t need to use your house as collateral to qualify. Your interest rate and qualification are based largely on your credit score. Funding comes quickly; once you agree to the terms, many lenders deposit money straight into your account in as little as a day.

Home repair loans and remodel loans typically have shorter repayment timelines, lower loan amounts and fewer fees than home equity loans or HELOCs. They’re typically best for small or midsize projects in your home, such as a bathroom makeover or window replacement.

However, because they’re unsecured, home renovation loans typically have higher rates than home equity loans and HELOCs, especially if you have fair or poor credit. Some lenders also charge fees for application processing, late payments and even prepayments on a remodel loan. Before applying, compare the best home improvement loan lenders that offer low interest rates, competitive fees, friendly repayment terms and quick payouts.

Key benefits: You don’t need to have any equity to secure this type of loan.

Key drawbacks: A home improvement loan is usually for a smaller amount and won’t work for funding larger projects. This type of loan also usually has higher interest rates than other types of loans since it is unsecured.

Who is this best for: Someone with poor credit or not much home equity who has a small home project to finance

3. Home equity line of credit (HELOC)

Because a HELOC is a secured loan — backed by your home — you can qualify for lower interest rates than you would for an unsecured personal loan. A HELOC is also revolving credit, which means you can take what you need when you need it (up to your borrowing limit).

However, because you’ll have to put your home up as collateral, it could be foreclosed if you don’t make payments on time. Most HELOCs also have variable interest rates, which means your payments can increase depending on market conditions.

HELOCs do come with one major prerequisite: To borrow against your house, you must have sufficient home equity. Before considering a HELOC, make sure you have at least 15 percent to 20 percent equity in your home.

Key benefits: This is a great option for ongoing home projects without a set budget as you can borrow what you need as you need it up to your limit.

Key drawbacks: Because a HELOC is borrowed against the value of your home, you risk losing your home if you cannot pay it back.

Who is this best for: Someone with good credit and sufficient home equity who is not sure of the exact budget for their home renovation

4. Home equity loan

Instead of a HELOC, you could apply for a home equity loan, which is sometimes referred to as a second mortgage. Like a home improvement loan, this is a loan paid out in a lump sum that you can repay over a number of years in regular fixed monthly payments.

With home equity loans, you don’t have to worry about market fluctuations; once you lock in your fixed interest rate, you pay the same monthly payment over the life of your loan.

Key benefits: If you know exactly how much your project will cost, a home equity loan could be the perfect remodel loan option since you’ll receive all funds upfront.

Key drawbacks:  Because this type of loan also uses your home as collateral, your home could be foreclosed if you fall too far behind on payments. A home equity loan also means you will have another monthly payment to pay over the life of your loan.

Who is this best for: Someone who needs a lump sum of money to finance a home project upfront and who has the ability to make an additional payment every month on this loan.

5. Cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and gives you a new interest rate. Since you get to pocket the difference between your old mortgage and the new loan, you could use the extra dollars from a cash-out refinance to make home improvements.

If you’re thinking about refinancing, consider the drawbacks carefully. You’ll need to pay for an appraisal, origination fees, taxes and other closing-related costs. And unless you refinance your mortgage for a shorter term, you’ll be extending the life of your loan, meaning it will take you longer to pay it off. In general, refinancing is only a good idea if you can secure a lower interest rate than what you pay now.

Key benefits: You won’t be adding a second monthly payment for yourself with a cash-out refinance.

Key drawbacks:  A cash-out refinance will make the life of your loan longer, so it will take longer for you to pay off.

Who is this best for: Someone who can’t afford an additional monthly loan payment and who can secure a better interest rate than their existing mortgage

6. Credit cards

If you’re making minor updates to your home, such as upgrading a bathroom vanity or installing a new closet system, using your credit card might be one of the best home improvement financing options.

What’s the advantage? Some cards are interest-free for the first few months. If you’re using a 0 percent introductory APR card, you could pay for minor home improvements without ever paying interest. Many cards also come with great rewards, so the more you spend on a renovation, the more cashback you could earn if your credit card offers cashback perks.

There are some risks associated with making large home improvement purchases on a credit card. If you can’t pay your balance back before the introductory offer expires, you could face exceptionally high interest rates — much higher than other home remodel loan options. If you use your regular card instead of an introductory offer card, you’ll need to pay the entire amount back by your next billing cycle — usually a month — if you want to avoid interest. With variable interest rates, that amount you pay in interest could also rise as market conditions shift.

Key benefits: With smaller home projects, you could get interest-free financing through a credit quickly and possibly earn rewards as part of your introductory offer.

Key drawbacks:  Once the introductory period ends, interest rates will be much higher than other home renovation loan options. If you use an existing credit card, you will have to pay back what you borrow within the billing cycle to avoid paying high interest.

Who is this best for: Someone with smaller home projects who can earn rewards on the money spent and pay back what you owe before high interest rates kick in

7. Government loans

If you qualify for a government loan, you could save on the costs of interest and insurance.

One type of government loan is a HUD Title I Property Improvement Loan. It lets you borrow up to $25,000 without having any equity in your home. This is a good home repair loan option if you’ve recently purchased your home and need to make upgrades. However, the money must go toward renovations that improve the livability of the home, and some upgrades may not qualify.

Veterans Affairs also offers cash-out refinance loans, which allow you to refinance a conventional home loan and take out cash on the equity of your home. In the event that you can’t make payments, the VA loan guarantee is the “insurance” it provides to your lender.

Key benefits: Government loans typically have better terms than private loans.

Key drawbacks:  Not all home projects or homeowners qualify for government loans, and the terms have specific requirements for borrowers.

Who is this best for: Someone who qualifies and fits the specific requirements of the government loan

The bottom line

Financing a home project takes planning. Homeowners should consider all the options and choose the financing path that is best for their project and financial situation. When looking into different loan options, talk to multiple lenders to get the best terms.

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